As individuals progress through their professional careers, various retirement savings vehicles are available, each offering distinct advantages and suitability depending on an individual’s financial goals, tax considerations, and preferences.
There are numerous retirement savings vehicles, but this article will focus on the most commonly used options, including:
- Traditional Individual Retirement Accounts (IRAs)
- Roth Individual Retirement Accounts (IRAs)Â
- 401(k) PlansÂ
- Health Savings Accounts (HSAs)Â
Additionally, we will discuss how to determine the right retirement savings vehicle that aligns with your needs.
What are Traditional Individual Retirement Accounts (IRAs)?
Traditional IRAs are one of the most common retirement savings vehicles, providing tax-deferred growth on contributions.
With a traditional IRA, individuals can contribute a certain amount of their income each year, and the contributions are tax-deductible, meaning they reduce taxable income for the year in which they are made.
The earnings within the account grow tax-free until withdrawal during retirement. However, withdrawals made during retirement are subject to income tax, making it an attractive option for those expecting to be in a lower tax bracket during retirement.Â
How do Roth Individual Retirement Accounts (IRAs) Work? Â
Roth IRAs offer a different approach to retirement savings. With a Roth IRA, contributions are made with after-tax dollars, meaning they are not tax-deductible in the contribution year.
However, the key advantage of a Roth IRA lies in its tax-free growth and withdrawals during retirement. Qualified withdrawals from a Roth IRA are entirely tax-free, providing a tax-efficient income stream during retirement.
Roth IRAs appeal to individuals who anticipate being in a higher tax bracket during retirement or those seeking more flexibility in accessing their contributions.Â
What are the Benefits of 401(k) Plans as Employer-Sponsored Retirement Accounts?
401(k) plans are employer-sponsored retirement accounts, that allow employees to contribute a portion of their salary to the retirement plan.
Many employers offer matching contributions, which serve as an incentive for employees to participate actively. One of the primary advantages of 401(k) plans is the higher contribution limit compared to traditional and Roth IRAs, enabling individuals to save more for retirement.
Additionally, 401(k) plans often offer a range of investment options, allowing employees to grow their retirement savings through various financial instruments.Â
How can Health Savings Accounts (HSAs) be Utilized for Retirement Savings?
While primarily associated with covering current healthcare expenses, Health Savings Accounts (HSAs) can also serve as a valuable retirement savings vehicle.
HSAs are available to individuals with high-deductible health insurance plans. Contributions to HSAs are tax-deductible, and withdrawals made for qualified medical expenses are tax-free.
However, after the age of 65, individuals can withdraw funds for non-medical expenses without penalty, similar to a traditional IRA. This unique feature makes HSAs a powerful tool for retirement savings, allowing individuals to save for both healthcare costs and general retirement needs.Â
How do you Determine the Right Retirement Savings Vehicle for Your Needs?Â
Choosing the right retirement savings vehicle depends on various factors, including your current financial situation, expected future income, and long-term retirement goals. Here are some considerations to keep in mind:Â
- Tax considerations: Assess your current and projected future tax brackets to determine whether a traditional or Roth retirement account is more beneficial for your circumstances.Â
- Employer benefits: If your employer offers a 401(k) plan with a matching contribution, take advantage of this benefit as it represents “free money” towards your retirement savings.Â
- Investment options: Consider the investment choices available within each retirement account and align them with your risk tolerance and investment preferences.Â
- Health expenses: If eligible, consider utilizing an HSA as part of your retirement savings strategy, especially if you anticipate higher medical expenses during retirement.Â
- Long-term goals: Evaluate your retirement goals, such as travel plans, hobbies, or volunteer work, and determine which retirement account aligns best with these aspirations.Â
About the Financial Authors
Alexander Langan, J.D, CFBS, currently serves as the Chief Investment Officer at Langan Financial Group. In this role, he manages investment portfolios, acts as a fiduciary for group retirement plans and consults with clients regarding their financial goals, risk tolerance and asset allocation.
With a focus on ERISA Law, Alex graduated cum laude from Widener Commonwealth Law School. He then clerked for the Supreme Court of Pennsylvania and worked in the Legal Office of the Pennsylvania Office of the Budget, where he assisted in directing and advising policy determinations on state and federal tax, administrative law, and contractual issues.
Alex is also passionate about giving back to the community, and has helped establish The Foundation of Enhancing Communities’ Emerging Philanthropist Program, volunteers at his church, and serves as a board member of Samara: The Center of Individual & Family Growth. Outside of work and volunteering, Alex enjoys his time with his wife Sarah and their three children, Rory, Patrick, and Ava.
Reid Ruark currently serves as an Associate Investment Advisor at Langan Financial Group where he assists Alex in managing investment portfolios, prepares client reviews, and helps operate social media platforms. In his free time, Reid enjoys spending time with his wife, playing pickleball and connecting with members of the community.
About the Retirement Planning Firm – Langan Financial Group
Langan Financial Group is an award winning independent financial planning firm with 10+ independent awards and over 100+ 5 star reviews.
Langan Financial Group has two financial planning locations – Harrisburg, Pa and York, Pa. Established in 1985, Langan Financial Group offers a broad range of financial planning services for individuals and organizations.
By being an independent firm, we are not required to sell any specific products or meet any specific quotas. As such, we are able to focus more on providing fiduciary services and customizing a specific personalized financial plan according to your needs.
Disclosures
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
